Tinker no more
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Reforming financial markets will need clarity in rules and coordination within government
Finance Minister P. Chidambaram has promised a fresh focus on financial sector reforms in coming days. Today, the broken bond-currency-derivatives nexus is undermining the fight against inflation. The banking system is in the early stages of an NPA crisis. Ponzi schemes and misselling are causing difficulties for households. Yet, in the field of finance, the government has been operating with the old mindset of the control regime. For instance, extreme distortions in the money market were brought in during the defence of the rupee in 2013, all of which need to be reversed.
The present government has lost credibility by making lofty statements that are not followed through. Bridging the gap between ideas and action requires thinking through the precise drafting of legal instruments, changes in organisation structures in all financial agencies, transformation of teams in financial agencies and the finance ministry, and establishing a mission-oriented work programme. The old status quo of financial policy — where India ran a licence-permit raj in finance with hundreds of detailed controls on all products and processes — has been thoroughly discredited, and there is a need to start over.